Islamic finance a boost for USAID's Afghan farm fund

February 07, 2013|Reuters

By Bernardo Vizcaino

SYDNEY, Feb 7 (Reuters) - Economic instability and legalobstacles have slowed the introduction of modern forms ofIslamic finance in Afghanistan. But sharia-compliant loans arebeginning to play a role in the farm sector through aU.S.-funded aid programme.

The Afghan government is using Islamic financial contractsto extend credit to farmers in areas where conventional bankinghas not fully satisfied demand for funds.

The Agricultural Development Fund (ADF), set up in 2010through a $100 million grant from the U.S. Agency forInternational Development (USAID), offers both conventionalcredit and Islamic financing.

About $11 million of its loans approved between May 2011 andApril 2012, or 70 percent of them, were sharia-compliant, theADF says. Islamic finance obeys a religious ban on payment ofinterest and instead pays lenders with returns on real assets.

Demand for such financing has been particularly strong inrural communities because people there tend to be conservative,said Juan Estrada-Valle, acting chief executive of the ADF.

In Afghanistan's conventional banking sector, officiallending rates hover around 15 percent, according to the WorldBank, and farmers have been forced to buy agricultural inputsfrom traders on credit at inflated margins that in some casesexceed 40 percent.

"Credit has the potential to revolutionise Afghanagriculture, enabling commercial farmers and otheragribusinesses to grow at a rapid pace and contribute to thegrowth of rural communities," Estrada-Valle said.

PERCEPTIONS

The ADF has had to overcome perception problems with itsIslamic contracts. Some customers and their religious advisorswere under the incorrect impression that Islamic loans should befree or cheaper than conventional ones.

While customers already knew of Islam's prohibition oninterest, borrowers had to be educated about other principlesincluding the fact that non-payment by a solvent borrower is asin, Estrada-Valle said.

The ADF's loan portfolio includes an all-women saffronassociation in Herat, apple farmers in Wardak province, and anindustrial-scale producer of agricultural machinery inJalalabad.

As of October 2012, the ADF had provided loans to more than15,000 farm households in 30 of Afghanistan's 34 provinces; itsays it expects to reach 60,000 farmers by the end of 2014.

Its Islamic contracts follow the Hanafi school of thought,the predominant version of Islamic law in Afghanistan. The fundhas so far developed five sharia-compliant contracts which caterto specific needs, said Natalie Schoon at British-basedfinancial consultancy Formabb, who was involved in the project.

One contract incorporates a down payment to allow hiring oflabour and tools for the harvest period; others are designedbearing in mind crop cycles.

Estrada-Valle said the ADF initially intended to make fundsavailable to local financial institutions for on-lending toagricultural enterprises, but the financial institutionsappeared not to have any appetite for this.

So the ADF changed its focus to lending throughnon-financial institutions to farmers as well asagriculture-related enterprises; typical intermediaries includeassociations, cooperatives and large-scale farm stores.

A law covering independent Islamic banks has yet to beapproved by Afghanistan's parliament, and this is hindering theoverall development of Islamic finance in the country. But sincethe ADF was set up as a fund, it is not subject to bankingregulations, Schoon said.

Last May, the central bank said it was considering issuingshort-term Islamic bonds, or sukuk, to help the government raisemoney and develop the financial markets.